Mortgage rates rise despite BOE’s Quantative Easing

A factor in this was the lack of competition in the UK banking sector which I illustrated back on the 3rd of December 2009 with the number of building societies in the UK.

1989 there were 110

1999 there were 69

2009 there are 52

At the time I wrote that the number was about to shrink again as the Yorkshire and Chelsea Building Societies were about to merge. In the banking sector we had seen a similar reduction in competition where at one stage mergers such as that between Royal Bank of Scotland and National Westminster Bank were seen by some as the cutting edge of banking. What happened to them? And even in the credit crunch era the last UK government proved that it was no fan of competition by encouraging the disastrous merger between Lloyd’s Bank and Halifax Bank of Scotland.

What did this create?

I pointed out even then that we were seeing a much higher level of mortgage rate for a given level of official base rate which even then was at 0.5%. I went on to point out that the 0.5% base rate was therefore likely to have a much weaker effect on the UK economy than econometrics and many “experts” might have you believe.

'So for an individual taking out a new mortgage the effect under the old system is for a base rate of at least 2.5% and maybe 3.5%. I hope that I have your attention now as interest rates for mortgages are offsetting much of the cuts the Bank of England has made in the UK base rate. It is my opinion that for this reason and other similar movements in other types of borrowing that we can expect the interest rate cuts to have much less of an impact on the UK economy than economic models would predict.'

I think that the forecast there has in fact turned out to be true over the following 2 and a bit years where we have seen only a weak recovery. By contrast conventional economic theory had been predicting economic effects from a 0.25% move in base rates and so would have been expecting some sort of economic nirvana from a cut of over 4%. One consequence of this is that the “emergency” 0.5% base rate from the Bank of England is now 3 years old , although according to my developing financial lexicon it can still be described as temporary (any event between now and the end of time).

More Competition was needed even then

I did have a policy prescription which was to encourage more competition and I would have started by breaking up what has become called the Lloyd’s Banking Group as described below.

'For example there are two old building societies within it,these are Cheltenham and Gloucester and Birmingham Midshires. These could be spun off and recreated as building societies and return to their “old” business of retail savings and retail mortgages to help provide more competition.'

I also suggested a remutualisation of Northern Rock with its members buying it off the taxpayer over time and would have encouraged other players to join the industry. Although mind you according to the blog Left Foot Forward the “bad bank” part of Northern Rock will not only make profits but “this will be generated every year going forward”. The emphasis was theirs and I await their installments on cold nuclear fusion and perpetual motion which are about as likely! Will they share their crystal ball?